The Ripple effect: what’s the impact on banking?

We are always inspired by interesting technology, especially when it causes a bit of a stir in the fintech press, so recently we took a closer look at the new payments technology from Ripple Labs. They are a great case study in how banks can leverage emerging technology to make existing processes – payments in this case – more efficiently.

Ripple is a new technology infrastructure that enables the settlement of payments anywhere in the world in near-real time, while materially reducing the risks and costs inherent in existing systems. The technology was developed by San Francisco-based Ripple Labs as an open-source system based on Internet protocols, permitting domestic and international payments in any combination of currencies to be settled directly between the parties without the need for central clearing houses or correspondent banks.

Ripple is already used by a few banks in the US and Europe, and Ripple Labs is discussing its implementation with a range of global financial institutions. However, there is no intention for Ripple to replace the existing web of national and regional settlement systems in use around the world. Instead, it works alongside, linking them seamlessly and enabling them to operate faster and more efficiently as a single, global network with comprehensive traceability and reporting.

"Ripple is not designed to replace central banks or correspondent banks," says Welly Sculley, Director of Business Development. "It's a neutral technology that they can adopt to increase the efficiency of transferring value domestically and cross-border." For us, therefore, Ripple Labs represents clearly complementary technology in the emerging market for global, experience-driven banking.

Ripple is a private company founded in late 2012 and today has about 100 staff, of whom 70 are technology specialists. The company has recruited seasoned financial services professionals to key roles including its Head of Compliance, who previously worked at the New York Federal Reserve and Promontory Financial Group, the global consultancy. Its Head of Risk came via the Federal Reserve Board's Payments Group and Promontory, and its General Counsel was recruited from the Depository Trust & Clearing Corporation. Ripple's cryptographic security specialists have backgrounds in law enforcement and national security.

In areas such as communications and media, Internet technology has improved the speed and efficiency of distributing information. By contrast, the major existing settlement infrastructure technologies are now decades old and pre-date the transformation that the Internet has brought to fields beyond financial services. As a result, sending a payment within the US to someone who is not a customer of the same bank will typically take at least one working day. By contrast, an email sent to that person will reach them in between two and five seconds, the same speed at which a payment sent via Ripple will be settled with the funds available in the recipient's account, anywhere in the world.

"We think this is a fundamental shift in how value can be transported. This isn't about creating a better post office; it's a fundamentally different way of transferring value," says Sculley.

Transactions complete within seconds and because the process does not rely on central intermediaries, it is also cheaper and less risky. Reliance on intermediaries is capital intensive and exposes the participants to additional counterparty and settlement risk, all of which Ripple bypasses. Moreover, if a problem or error occurs there will be an immediate alert, whereas with a conventional payment it may take days for the parties to become aware of a problem and weeks for the issue to be resolved.

Where cross-border payments are involved, Ripple's infrastructure also reduces currency risk by shrinking the time required for settlement to a matter of seconds. Payments can be made between any currency pair because Ripple arranges the exchange of currencies from a competitive marketplace of authorised providers that bid to deliver funds. When a sender initiates a payment, Ripple's algorithm sources the required funds from the lowest cost provider in the market at that moment.

For example, people in the US are now using Ripple's service, via Saldo.mx, to pay their families' utility bills in Mexico instantly, without the necessity of having a Mexican bank account. Uses such as this illustrate one of the two major applications that Ripple's creators envisage for it: cost-effective, cross-border payments in real time, either between individuals or small businesses. The other is instant domestic settlement in a single currency.

Ripple is attracting great interest among leading financial institutions around the world. In the two years that its technology has been live, two US banks, Crossover and CBW, have publicly announced that they are integrating with Ripple. So has Fidor, a German bank. In addition, Earthport, a global payment service network whose customers include HSBC, Bank of America and Standard Chartered Bank, has adopted the technology.

Some see Ripple's technology as having the potential to create a global real-time gross settlement system. Such systems that operate in near-real time exist in some national and regional banking markets, but until Ripple's emergence there had been nothing to knit them together.

"There's a huge opportunity to capture a lot more efficiency from existing technology," says Sculley. "That's what Ripple aims to do."